The global economic downturn that triggered a universal trade contraction has perhaps reached its trough. Companies surviving the trade contraction learned two lessons, albeit painfully; one, that tactical initiatives such as discounting and promotional offers to woo panicking consumers do not really work.
The second lesson is that inflexible market positions could end up being a liability. The news for firms struggling to manage these challenges is rather bleak; depressed market conditions are set to spill over to 2010. The contributing factor of course is that consumer confidence is yet to be restored, the uncertainty triggering concern about organization’s cash flows. The analysis focuses on the impact of the changed circumstances of the consumer and how these two lessons can prepare companies for the upturn.
Consumer response to tactical initiatives
Marketers mistakenly believe that the challenges are out there in the market; thus the tactical responses. If the assumption is that consumers stay within the category and resort to switching brands in an economic downturn, offering discounts may prevent the switch in the short-term. Reducing prices does address affordability issues; however regular discounting can damage a carefully built attribute of the brand. Indiscriminate price cutting threatens the already razor thin bottom-line and certainly would do no good to the organization’s top-line. Discounting will also not bring the customer back to her previous levels of spending because her perception of value has changed.
The trigger for an upturn must come from resurgent consumer confidence. Consumers across the globe have been forced to make painful adjustments to their new circumstances and reconfigure their spending patterns. A first step to winning consumers back is to understand how they are coping during the downturn. Marketers must have answers to two fundamental questions: “Firstly, does the consumer as we knew her exist anymore or do we have a new and different consumer instead?” Secondly, are our current segmentation criteria valid?”
We dare say that the answer to both these questions is a firm “No”. The economic downturn means that your customers’ circumstances and their daily priorities have changed. You are perhaps talking to a new set of consumers whose needs and wants may have changed with their changed economic status; therefore no amount tweaking of old, dated value propositions can fix customer confidence.
Thus, a strategic precursor to countering the meltdown is to look inwards and see how these changes impact your brands.
Reconfigure your value proposition
If the consumer’s perception of value has changed, re-examination of the relevance of the current offering to your target consumer would be a required second step. Of course one cannot assume that the changed economic status of the consumer will induce her to accepting lower value. As a matter of fact the way consumers buy may have changed, however, the way in which they want to experience a product or service may not have changed.
It might be worth your while to dust off old discarded products and put them back on the shelf. A brand of Full Cream Milk Powder in response to the downturn reintroduced the pillow pack, which was common about a decade ago. Consumers do not see real value in the carton pack and this company was quick to seize the opportunity.
What about premium brands? As value gets redefined, the equity built by premium brands will be tested in the market place. Unless companies can offer a distinct value proposition to a clearly defined target audience, companies are going to struggle. Today consumers seek value on a number of different dimensions. Functionality is being redefined frequently; functionality in food is not restricted to taste and nutrition, but must include wellness. Cosmetics are no more mere cosmetics. They need to have additional therapeutic values built-in. Cosmetics with pharmaceutical properties dubbed “Cosme-ceuticals” is a growth category for most companies.
The threat of a reduction in income, and rising costs naturally force consumers to review their consumption choices. According to the Central Bank, 38% of the average household income of approximately Rs. 17,500 is spent on food, compared to 20% in develped countries and 25 to 30% in newly `developing countries. What does a household do with just under Rs. 6000/- for food? And more importantly, what else do households spend on?
In the Sri Lankan context, these changed economic circumstances of the consumer must be juxtaposed with some key demographic trends. Fundamentally, among many, three trends that families have to contend with stand out. These are time pressures, caring for dependents, and concerns about their children. Seeking convenience in food choices is a universal coping mechanism adopted by time pressured housewives.
Thus, a food basket should consist of a higher proportion of packaged convenience food. The reality however, is that the food basket consists primarily of essential commodities, and not packaged food. One would like to argue that companies have done little to take advantage of this opportunity offering convenience and value. A notable change in consumption patterns is the switch from wheat to rice. Sri Lanka has been slow to take advantage of this trend. Walk into a supermarket in Thailand and you could gauge the potential for rice based products.
Another challenge the consumer juggles with is demographic; the increase in the percentage of households with dependent parents. There are financial implications as many households allocate extra cash for the well-being of their parents. A parallel but opposing development is the reduction of the primary household size. As a consequence of the declining births mean parents are becoming more indulgent. Product categories catering to these two segments therefore should do well.
Opportunities that can be optimized
The urban rural divide is blurring with the rapid development of infrastructure, including new roads, and telecommunications facilities. Easy access to new products and services allow rural consumers the opportunity to trial products considered the staple of their town cousins. Statistically just under 40% of Sri Lankans live in what might be termed urban areas as opposed to 22% a decade ago.
This is a significant market opportunity that cannot be ignored. While a number of typologies and tools have been developed to segment the market, to characterize and group consumers, the current typology may not really describe the aspirations and expectations of this group of consumers. Sri Lanka may not need sophisticated models but a simple rule of thumb classification. According to studies done by leading market research companies typically three significant groups of consumers can be identified. Those who live in rural areas and subscribe to conservative rural values (Rural Conservatives), those who live in urban areas, but have strong links to their rural roots (City Conservatives) and finally the city contemporary consumer who is fully integrated into an urban lifestyle and is weaned of their rural connections (City Contemporary). Are marketers fully exploiting these new opportunities?
Responding to the new consumer
Value is being redefined by consumers who are facing economic uncertainty. Marketers who have stayed with their old value propositions may find that consumers are abandoning them and making choices that are in line with their changed circumstances. Short term tactical initiatives may offer hope but only those firms seeking to understand and offer true value will ride out the turbulent downturn.